Micro Efficiency and Macro Growth

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Abstract

This paper is about micro foundations of
productivity and growth. There are several studies on
productivity for advanced economies but relatively few for
developing countries. Using data from the investment climate
surveys of the World Bank, estimation results from 45
developing countries, complemented by extended analysis at
firm and industry levels for Brazil and India for the period
2002-05, indicate the following: (i) confirmation of the
importance of total factor productivity at firm, industry
and national levels, but total factor productivity
progressively tapers off at each level of aggregation
implying that there is a less than one-to-one relationship
between micro-efficiency, sector growth, and macro growth;
(ii) capital accumulation is more important at the macro
level than the micro level; (iii) productivity at the micro
level is driven by research and development, the capacity
utilization rate, and adoption of foreign technology (all of
which involve management decisions), and is negatively
related to corruption and instability, tax, and financial
regulations; and (iii) confirmation of the lower
contribution of total factor productivity to output growth
in developing countries than in developed economies.
Management decisions are involved in a lot of day-to-day
operations at the firm level and therefore management is an
unmeasured input. In developing countries, at the firm
level, there is a need to understand the contribution of
quality of inputs (management quality, education and labor
quality, training, experience of workers, use of computers
at work) and also the role of external agglomeration (for
example, location in a booming city, competitive pressures
from new firms, trade competition, and regulations).